Vietnam domestic market growth slows after several years of rapid expansion

Vietnam has had one of the world’s fastest growing domestic aviation markets this decade but the rate of growth is slowing and is expected to be in the single digits in 2018 for the first time in several years.


Highlights

  • Vietnam has had one of the world’s fastest growing domestic markets since 2012;
  • However, growth is expected to be in the single digits in 2018 for the first time in several years;
  • Vietnam Airlines has adopted a successful dual brand strategy and has 60% domestic market share with VietJet accounting for the remaining 40%.

Vietnam recorded annual domestic growth of 20% to 30% per annum from 2012 to 2016. Over the four-year period the market grew by more than 130%, from 12 million passengers in 2012 to 28 million passengers in 2016.

Vietnam Airlines CEO Duong Tri Thanh says domestic growth in Vietnam slowed to 13% in 2017. At the end of 2017 the airline group was expecting similar growth for 2018 but now Mr Thanh expects growth will be less than 10%.

“I think the growth boom is over,” Mr Thanh said. “Now it has stabilised.”

The Vietnam Airlines Group, which includes LCC subsidiary Jetstar Pacific and turboprop subsidiary VASCO, accounts for approximately a 60% share of Vietnam’s domestic market. The remaining 40% of domestic passengers in Vietnam are carried by VietJet Air, which has grown rapidly since it commenced operations at the end of 2011.

In 2017, for the first time VietJet did not grow its domestic market share. VietJet and Jetstar Pacific are now focusing more on the international market, which is growing faster and is less saturated from an LCC stimulation perspective than the domestic market.

The slowdown in the domestic market is due to infrastructure constraints, higher fuel prices and the fact the market has already been stimulated with very low fares. Mr Thanh said the domestic market “is still a good opportunity for us” but the rate of growth over the next few years will be significantly less. “Now the point is how the government will balance the growth of the airline business and the growth of the infrastructure.”

Vietnam has a vast domestic market with 50 nonstop routes. However, Vietnam Airlines generally only makes money on Ho Chi Minh-Hanoi route, the world’s sixth largest route based on weekly seat capacity.

Mr Thanh said Vietnam Airlines enjoys a 40% average fare premium over LCCs in the Ho Chi Minh-Hanoi market, where it operates a shuttle service and focuses on offering a high-quality service with a consistently high on time rating. On smaller domestic routes Vietnam Airlines is only able to charge a slightly higher fare than LCCs that is generally not sufficient to cover its 20% to 25% higher costs.

Vietnam Airlines has adopted a dual brand strategy for the domestic market, which is borrowed from the Qantas Airways Group. Qantas is a close partner, owning 30% of Jetstar Pacific and codesharing with Vietnam Airlines. Jetstar Pacific operates alongside Vietnam Airlines on domestic trunk routes and Jetstar Pacific has taken over some smaller routes.

Mr Thanh said the dual brand strategy enables Vietnam Airlines to cover all segments of the market. Vietnam Airlines and Jetstar Pacific have an extensive codeshare but connecting traffic between the two airlines is now limited.